QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

﻿

For the quarterly period ended June 30, 2017

OR

﻿

﻿

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

﻿

For the transition period from ____________________ to_____________________

Commission file number 001-34903

TOWER INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

﻿

Delaware

27-3679414

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

17672 Laurel Park Drive NorthSuite 400 E

48152

Livonia, Michigan

(Zip Code)

(Address of principal executive offices)

(248) 675-6000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. Check one:

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Large Accelerated Filer ☐

Accelerated Filer ☒

Non-Accelerated Filer ☐(Do not check if a smaller reporting company)

Smaller Reporting Company☐

Emerging growth company☐

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12(b)-2 of the Securities and Exchange Act).

Yes ☐ No ☒

As of July 21, 2017, there were 20,521,093 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

Capital expenditures in liabilities for purchases of property, plant, and equipment

$

17,912

$

20,327

﻿

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

﻿

4

﻿

TOWER INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Organization and Basis of Presentation

Tower International, Inc. and its subsidiaries (collectively referred to as the “Company” or “Tower International”), is a leading integrated global manufacturer of engineered automotive structural metal components and assemblies, primarily serving original equipment manufacturers (“OEMs”), including Ford, Volkswagen Group, Fiat-Chrysler, Volvo, Nissan, Daimler, Toyota, BMW, and Honda. Products include body structures, assemblies and other chassis, structures, and lower vehicle systems and suspension components for small and large cars, crossovers, pickups, and sport utility vehicles (“SUVs”). Including both wholly owned subsidiaries and majority owned subsidiaries, the Company has strategically located production facilities in the United States, Germany, Belgium, Slovakia, Italy, Poland, Mexico, and the Czech Republic, supported by engineering and sales locations in the United States, Germany, Italy, Japan and India.

The accompanying Condensed Consolidated Financial Statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The information furnished in the Condensed Consolidated Financial Statements includes normal recurring adjustments and reflects all adjustments which are, in the opinion of management, necessary for the fair presentation of such financial statements. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the SEC. Although the Company believes that the disclosures are adequate to make the information presented not misleading, these Condensed Consolidated Financial Statements should be read in conjunction with the audited year-end financial statements and the notes thereto included in the most recent Annual Report on Form 10-K filed by the Company with the SEC. The interim results for the periods presented may not be indicative of the Company’s actual annual results.

Principles of Consolidation

The Condensed Consolidated Financial Statements include the accounts of the Company and all subsidiaries over which the Company exercises control. All intercompany transactions and balances have been eliminated upon consolidation.

﻿

Note 2. New Accounting Pronouncements

﻿

Retirement Benefits

On March 10, 2017, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU is designed to increase the transparency and usefulness of information about defined benefit costs for pension plans and other post-retirement benefit plans presented in employer financial statements. This ASU is effective for interim and annual periods after December 15, 2017. Early adoption is allowed, and requires that the guidance be applied retrospectively to all prior periods. Effective October 1, 2006, the Company’s pension plan was frozen and the Company ceased accruing any additional benefits; as such, the Company does not expect a material financial statement impact related to the adoption of this ASU.

Stock Compensation

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions. This ASU is effective for annual reporting periods beginning after December 15, 2016, and interim periods therein. Upon adoption in the first quarter of 2017, the Company recorded a cumulative adjustment for previously unrecognized tax benefits to accumulated surplus of approximately $5.3 million.

Revenue Recognition

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU outlines a single comprehensive model for entities to utilize to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that will be received in exchange for the goods and services. Additional disclosures will also be required to enable users to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB deferred the effective date of this standards update to fiscal years beginning after December 15, 2017, with early adoption permitted on the original effective date of fiscal years beginning after December 15, 2016. In 2016, the FASB issued ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-11, and ASU 2016-12, all of which amend the implementation guidance and illustrations in the Board’s new revenue standard.

5

The new revenue standards may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption.The Company currently expects to adopt the new revenue standards in its first quarter of 2018 utilizing the full retrospective transition method. The Company does not expect the adoption of the new revenue standards to have a material impact on its consolidated financial statements, but is still evaluating certain contracts with customers related to the development of tooling used in the manufacture of our products.

Leases

In February 2016, the FASB issued ASU No. 2016-02, Lease Accounting. This ASU introduces a lessee model that brings most leases on the balance sheet. Further, the standard also aligns certain of the underlying principles of the new lessor model with those in ASU No. 2014-09. This new ASU on leases is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating significant contracts and assessing any impact to the Consolidated Financial Statements.

﻿

Note 3. Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method. Maintenance, repair, and non-productive inventory, which are considered consumables, are expensed when acquired and included in the Condensed Consolidated Statements of Operations as cost of sales. Inventories consist of the following (in thousands):

﻿

﻿

﻿

June 30, 2017

December 31, 2016

Raw materials

$

33,632

$

31,993

Work in process

15,598

14,721

Finished goods

25,735

24,996

Total inventory

$

74,965

$

71,710

﻿

﻿

﻿

﻿

﻿

Note 4. Discontinued Operations and Assets Held for Sale

During the second quarter of 2016, the Company’s Board of Directors approved a plan to sell the Company’s remaining business operations in Brazil and China. At June 30, 2017, the Brazilian business operation and one Chinese joint venture are considered held for sale in accordance with FASB Accounting Standard Codification (“ASC”) No. 360, Property, Plant, and Equipment, and presented as discontinued operations in the Condensed Consolidated Financial Statements, in accordance with FASB ASC No. 205, Discontinued Operations. At December 31, 2016, both of the Brazilian and Chinese business operations were held for sale and presented as discontinued operations.

The following table discloses select financial information of the discontinued operations of the Company’s Brazilian and Chinese business operations (in thousands):

﻿

﻿

﻿

Three Months Ended June 30,

Six Months Ended June 30,

﻿

2017

2016

2017

2016

Revenues

$

18,820

$

27,781

$

48,776

$

50,083

Loss from sale of Wuhu discontinued operation

(2,596)

-

(2,596)

-

Income / (loss) from discontinued operations:

Income / (loss) before provision for income taxes and

equity in income / (loss) of joint venture

1,839

(19,226)

3,668

(19,384)

Provision / (benefit) for income taxes

(268)

795

211

982

Income / (loss) from discontinued operations

$

(489)

$

(20,021)

$

861

$

(20,366)

﻿

Sale of China Joint Ventures

In October of 2016, the Company entered into an agreement to sell its joint venture in Wuhu, China: Tower Automotive (“Wuhu”) Company, Ltd. The initial sale agreement provided for the purchase of the Company’s equity in the joint venture for approximately $21 million, net of tax. The Company received proceeds of $4.5 million in the fourth quarter of 2016. On May 9, 2017, the Company completed the sale of its equity interest in Wuhu. During the three months ended June 30, 2017, the Company received total net proceeds of $15.9 million related to the sale, which resulted in a total sales price that was less than the carrying value of the net assets of Wuhu. In addition, the Company incurred certain transaction related costs; therefore, a net loss of $2.6 million was recorded during the period ended June 30, 2017.

6

As of June 30, 2017, all proceeds from the transaction were received. Wuhu has been presented as discontinued operations in our Consolidated Financial Statements, in accordance with FASB ASC No. 205, Discontinued Operations.

Also, in October of 2016, the Company entered into an agreement to sell its joint venture in Ningbo, China: Tower (“Ningbo”) DIT Automotive Products Co., Ltd. The agreement is subject to Chinese government approval. The sale agreement provided for purchase of the Company’s equity in the joint venture for approximately $4 million, net of tax. The Company anticipates that this transaction will close in the fourth quarter of 2017.

Discontinued Brazil Operation

During the second quarter of 2016, the Company’s Board of Directors approved a plan to sell the Company’s remaining business operations in Brazil. During the second quarter of 2016, the Company recorded a fair value adjustment of $15 million that represents the cumulative translation adjustment related to Brazil.

﻿

The assets and liabilities held for sale are recorded at the lower of carrying value or fair value less costs to sell and are summarized by category in the following table (in thousands):

﻿

﻿

﻿

June 30, 2017

December 31, 2016

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ASSETS

Current assets

$

23,036

$

59,137

Property, plant, and equipment, net

28,372

47,640

Other assets, net

9,391

13,575

Fair value adjustment

(18,100)

(18,100)

Total assets held for sale

$

42,699

$

102,252

﻿

LIABILITIES

Short-term debt and current maturities of capital lease obligations

$

1,283

$

2,792

Accounts payable

11,980

43,661

Total current liabilities

13,263

46,453

﻿

Long-term debt, net of current maturities

1,751

2,393

Other non-current liabilities

1,895

4,464

Total non-current liabilities

3,646

6,857

Total liabilities held for sale

$

16,909

$

53,310

﻿

Note 5. Tooling

Tooling represents costs incurred by the Company in the development of new tooling used in the manufacture of the Company’s products. All pre-production tooling costs incurred for tools that the Company will not own and that will be used in producing products supplied under long-term supply agreements are expensed as incurred, unless the supply agreement provides the Company with the noncancellable right to use the tools or the reimbursement of such costs is contractually guaranteed by the customer. Generally, the customer agrees to reimburse the Company for certain of its tooling costs at the time the customer awards a contract to the Company.

After the part for which tooling has been developed reaches a production-ready status, the Company is reimbursed by its customer for the cost of the tooling, at which time the tooling becomes the property of the customer. Any gain recognized, which is defined as the excess of reimbursement over cost, is amortized over the life of the program. If estimated costs are expected to be in excess of reimbursement, a loss is recorded in the period in which the loss is estimated. Customer-owned tooling is included in the Condensed Consolidated Balance Sheets in prepaid tooling, notes receivable, and other. At June 30, 2017 and December 31, 2016, the Company had an asset related to customer-owned tooling of $119 million and $87.9 million, respectively.

7

﻿

Note 6. Goodwill and Other Intangible Assets

Goodwill

The change in the carrying amount of goodwill is set forth below by reportable segment and on a consolidated basis (in thousands):

﻿

﻿

﻿

Europe

North America

Consolidated

Balance at December 31, 2016

$

49,293

$

7,090

$

56,383

Currency translation adjustment

4,249

1,037

5,286

Balance at June 30, 2017

$

53,542

$

8,127

$

61,669

Intangibles

In the North America segment, an intangible asset of $3.5 million related to customer relationships was recorded in 2015, as part of the acquisition of a facility in Mexico. This intangible asset has a definite life and will be amortized on a straight-line basis over seven years, the estimated life of the related asset, which approximates the recognition of related revenues.

The Company incurred amortization expense of $0.1 million and $0.2 million for the three and six months ended June 30, 2017, respectively. The Company incurred amortization expense of $0.1 million and $0.2 million for the three and six months ended June 30, 2016, respectively.

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Note 7. Restructuring and Asset Impairment Charges

As of June 30, 2017, the Company has executed various restructuring plans and may execute additional plans in the future to reduce corporate overhead, to realign manufacturing capacity to prevailing global automotive production levels, and to improve the utilization of remaining facilities. Estimates of restructuring charges are based on information available at the time such charges are recorded. Due to the inherent uncertainty involved in estimating restructuring expenses, actual amounts paid for such activities may differ from amounts initially recorded. Accordingly, the Company may record revisions of previous estimates by adjusting previously established reserves.

Restructuring and Asset Impairment Charges

Net restructuring and asset impairment charges for each of the Company’s segments include the following (in thousands):

﻿

﻿

﻿

Three Months Ended June 30,

Six Months Ended June 30,

﻿

2017

2016

2017

2016

Europe

$

616

$

117

$

744

$

117

North America

2,721

723

6,504

1,469

Consolidated

$

3,337

$

840

$

7,248

$

1,586

The following table sets forth the Company’s net restructuring and asset impairment charges by type for the periods presented (in thousands):

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﻿

﻿

Three Months Ended June 30,

Six Months Ended June 30,

﻿

2017

2016

2017

2016

Employee termination costs

$

3,172

$

117

$

6,867

$

117

Other exit costs

165

723

381

1,469

Total restructuring expense

$

3,337

$

840

$

7,248

$

1,586

The charges incurred during the six months ended June 30, 2017 and 2016 related primarily to the following actions:

2017 Actions

During the three and six months ended June 30, 2017, the charges incurred in the North America and Europe segments related to severance charges to reduce corporate overhead and ongoing maintenance expense of facilities closed as a result of prior actions.

﻿

2016 Actions

During the three and six months ended June 30, 2016, the charges incurred in the North America and Europe segments related to ongoing maintenance expense of facilities closed as a result of prior actions and severance charges to reduce fixed costs.

8

Restructuring Reserve

The table below summarizes the activity in the restructuring reserve by segment, reflected in accrued liabilities and other non-current liabilities, for the above-mentioned actions through June 30, 2017 (in thousands):

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﻿

﻿

Europe

North America

Consolidated

Balance at December 31, 2016

$

92

$

197

$

289

Payments

(480)

(1,884)

(2,364)

Increase in liability

744

6,123

6,867

Balance at June 30, 2017

$

356

$

4,436

$

4,792

Except as disclosed in the table above, the Company does not anticipate incurring additional material cash charges associated with the actions described above. The changes in the restructuring reserve set forth in the table above do not agree with the restructuring charges for the period, as certain items are expensed as incurred related to the actions described.

The restructuring reserve increased during the six months ended June 30, 2017, reflecting primarily accruals for severance, offset partially by payments related to 2017 restructuring actions and prior accruals.

During the six months ended June 30, 2017, the Company incurred payments in Europe of $0.5 million and in North America of $1.9 million related to prior accruals and 2017 restructuring actions described above.

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Note 8. Debt

Short-Term Debt

Short-term debt consists of the following (in thousands):

﻿

﻿

﻿

June 30, 2017

December 31, 2016

Current maturities of debts (excluding capital leases)

$

45,234

$

33,277

Current maturities of capital leases

5,790

934

Total short-term debt

$

51,024

$

34,211

Long-Term Debt

Long-term debt consists of the following (in thousands):

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﻿

﻿

June 30, 2017

December 31, 2016

Term Loan Credit Facility (net of discount of $2,471 and $827)

$

358,125

$

361,798

Amended Revolving Credit Facility

30,000

-

Other foreign subsidiary indebtedness

41,619

28,777

Debt issue costs

(8,948)

(6,066)

Total debt

420,796

384,509

Less: Current maturities of debts (excluding capital leases)

(45,234)

(33,277)

Total long-term debt

$

375,562

$

351,232

Term Loan Credit Facility

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On March 7, 2017, the Company amended the Term Loan Credit Agreement by entering into the Third Refinancing Term Loan Amendment and Restatement Agreement (“Third Term Loan Amendment”), pursuant to which, among other things, the outstanding term loans under the Term Loan Credit Agreement were refinanced in full. There were no additional borrowings associated with this refinancing. The aggregate principal amount of $358.9 million was outstanding under the Term Loan Credit Agreement. The maturity date of the Term Loan Credit Facility is March 7, 2024 and the Term Loans bear interest at (i) the Alternate Base Rate plus a margin of 1.75% or (ii) the Adjusted LIBO Rate (calculated by multiplying the applicable LIBOR rate by a statutory reserve rate) plus a margin of 2.75%.

9

The Term Loan Borrower’s obligations under the Term Loan Credit Facility are guaranteed by the Company on an unsecured basis and guaranteed by Term Loan Holdco and certain of the Company's other direct and indirect domestic subsidiaries on a secured basis (the “Subsidiary Guarantors”). The Term Loan Credit Facility is secured by (i) a first priority security interest in certain assets of the Term Loan Borrower and the Subsidiary Guarantors, other than, inter alia, accounts, chattel paper, inventory, cash deposit accounts, securities accounts, machinery, equipment and real property and all contract rights, and records and proceeds relating to the foregoing and (ii) on a second priority basis to all other assets of the Term Loan Borrower and the Subsidiary Guarantor which have been pledged on a first priority basis to the agent for the benefit of the lenders under the Amended Revolving Credit Facility described below.

The Term Loan Credit Agreement includes customary covenants applicable to certain of the Company’s subsidiaries and includes customary events of default and amounts due thereunder may be accelerated upon the occurrence of an event of default.

As of June 30, 2017, the outstanding principal balance of the Term Loan Credit Facility was $358.1 million (net of a $2.5million original issue discount) and the effective interest rate was 3.875% per annum.

Amended Revolving Credit Facility

﻿

On March 7, 2017, the Company entered into a Fourth Amended and Restated Revolving Credit and Guaranty Agreement (“Fourth Amended Revolving Credit Facility Agreement”), by and among Tower Automotive Holdings USA, LLC, the Company, Tower Automotive Holdings I, LLC, Tower Automotive Holdings II(a), LLC, the subsidiary guarantors named therein, the financial institutions from time to time party thereto as Lenders, and JPMorgan Chase Bank, N.A. as Issuing Lender, as Swing Line Lender, and as Administrative Agent for the Lenders. The Fourth Amended Revolving Credit Facility Agreement amended and restated, in its entirety, the Third Amended Revolving Credit Facility Agreement, dated as of September 17, 2014, by and among Tower Automotive Holdings USA, LLC (“the Borrower”), its domestic affiliate and domestic subsidiary guarantors named therein, and the lenders party thereto, and the Agent.

The Fourth Amended Revolving Credit Facility Agreement provides for a cash flow revolving credit facility in the aggregate amount of up to $200 million. The Fourth Amended Revolving Credit Facility Agreement also provides for the issuance of letters of credit in an aggregate amount not to exceed $30 million, provided that the total amount of credit (inclusive of revolving loans and letters of credit) extended under the Fourth Amended Revolving Credit Facility Agreement is subject to an overall cap, on any date, of $200 million. The Company may request the issuance of Letters of Credit denominated in Dollars or Euros. The expiration date for the Amended Revolving Credit Facility is March 7, 2022.

Advances under the Amended Revolving Credit Facility bear interest at an alternate base rate plus a base rate margin or LIBOR plus a Eurodollar margin. The applicable margins are determined by the Company’s Total Net Leverage Ratio (as defined in the Fourth Amended Revolving Credit Facility Agreement). As of June 30, 2017, the applicable margins were 2.50% per annum for LIBOR based borrowings and 1.50% per annum for base rate borrowings, resulting in a weighted average interest rate of 3.98%. The Company will pay a commitment fee at a rate equal to 0.50% per annum on the average daily unused total revolving credit commitment.

The Amended Revolving Credit Facility is guaranteed by the Company on an unsecured basis and is guaranteed by certain of the Company’s other direct and indirect domestic subsidiaries on a secured basis. The Amended Revolving Credit Facility is secured (i) by a first priority security interest in certain assets of the Borrower and the Subsidiary Guarantors, including accounts, inventory, chattel paper, cash, deposit accounts, securities accounts, machinery, equipment and real property and all contract rights, and records and proceeds relating to the foregoing and (ii) on a second priority basis to all other assets of the Borrower and the Subsidiary Guarantors.

The Fourth Amended Revolving Credit Facility Agreement contains customary covenants applicable to certain of the Company’s subsidiaries and includes customary events of default and amounts due there under may be accelerated upon the occurrence of an event of default.

As of June 30, 2017, there was $161 million of unutilized borrowing availability under the Amended Revolving Credit Facility. At that date, there were $30 million of borrowings and $9 million of letters of credit outstanding under the Amended Revolving Credit Facility.

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Other Foreign Subsidiary Indebtedness

﻿

As of June 30, 2017, other foreign subsidiary indebtedness of $41.6 million consisted primarily of receivables factoring in Europe of $31.3 million, other indebtedness in Europe of $6.3 million, and $4 million of indebtedness outstanding on a secured credit line.

﻿

The change in foreign subsidiary indebtedness from December 31, 2016 to June 30, 2017 is explained by the following (in thousands):

﻿

﻿

﻿

Europe

Balance at December 31, 2016

$

28,777

Maturities of indebtedness

(714)

Change in borrowings on credit facilities, net

11,076

Foreign exchange impact

2,480

Balance at June 30, 2017

$

41,619

10

Generally, borrowings of foreign subsidiaries are made under credit agreements with commercial lenders and are used to fund working capital and other operating requirements.

﻿

As of June 30, 2017, the receivables factoring facilities balance available to the Company was $31.3 million (€27.4 million), of which the entire amount was drawn. These are uncommitted, demand facilities which are subject to termination at the discretion of the banks and bear interest rates based on the average three month EURIBOR plus a spread ranging from 2.50% to 3.00%. The effective annual interest rates as of June 30, 2017 ranged from 2.17% to 2.67%, with a weighted average interest rate of 2.48% per annum. Any receivables factoring under these facilities is with recourse and is secured by the accounts receivable factored. These receivables factoring transactions are recorded in the Company’s Condensed Consolidated Balance Sheets in short-term debt and current maturities of capital lease obligations.

﻿

As of June 30, 2017, the Company’s European subsidiaries had borrowings of $6.3 million (€5.5 million), which had an annual interest rate of 6.25% and matures in November 2017. This term loan is secured by certain machinery and equipment.

As of June 30, 2017, the secured line of credit balance available to the Company was $9 million (€7.9 million), of which $4 million in borrowings were outstanding. The facility bears an interest rate based on the EURIBOR plus a spread of 1.9% and matures in October 2017. The effective annual interest rate as of June 30, 2017 was 1.9% per annum. The facilities are secured by certain accounts receivable related to customer-owned tooling, real estate, and other assets, and are subject to negotiated prepayments upon the receipt of funds from completed customer projects.

As of June 30, 2017, the Company’s European subsidiaries had an asset-based revolving credit facility balance available to the Company of $33.6 million, of which no borrowings were outstanding. This facility bears an interest rate based upon one month LIBOR plus a margin of 4.00%, or base rate plus a margin of 3.00%, and matures in October 2017. Availability on the credit facility is determined based upon the appraised value of certain machinery, equipment, and real estate, subject to a borrowing base availability limitation and customary covenants.

Covenants

As of June 30, 2017, the Company was in compliance with the financial covenants that govern its credit agreements.

Capital Leases

The Company had the following capital lease obligations, which expire in March 2018, as of the dates presented (in thousands):

﻿

﻿

﻿

June 30, 2017

December 31, 2016

Current maturities of capital leases

$

5,790

$

934

Non-current maturities of capital leases

-

4,863

Total capital leases

$

5,790

$

5,797

Debt Issue Costs

The Company had debt issuance costs, net of amortization, of $8.9 million and $6.1 million as of June 30, 2017 and December 31, 2016, respectively. These amounts are reflected in the Condensed Consolidated Balance Sheets as a direct deduction from long-term debt, net of current maturities.

The Company incurred interest expense related to the amortization of debt issue costs of $0.5 million and $1.3 million during the three and six months ended June 30, 2017, respectively. The Company incurred interest expense related to the amortization of debt issue costs of $0.5 million and $1.5 million during the three and six months ended June 30, 2016, respectively.

﻿

Note 9. Derivative Financial Instruments

The Company’s derivative financial instruments include interest rate and cross currency swaps. The Company does not enter into derivative financial instruments for trading or speculative purposes. On an on-going basis, the Company monitors counterparty credit ratings. The Company considers credit non-performance risk to be low because the Company enters into agreements with commercial institutions that have at least an S&P, or equivalent, investment grade credit rating. On October 17, 2014, the Company entered into a $200 million variable rate to fixed rate interest rate swap for a portion of the Company’s Term Loan and a €157.1 million cross currency swap based on the U.S. dollar / Euro exchange spot rate of $1.2733 which was the prevailing rate at the time of the transaction. The maturity date for both swap instruments was April 16, 2020.

On March 7, 2017, the Company amended the $200 million variable rate to fixed rate interest rate swap, for a portion of the Company’s Term Loan, entered into on October 17, 2014. The U.S. dollar notional amount remained the same at $186.1 million, the fixed interest rate was changed from 5.09% to 5.628% per annum, and the maturity date was extended from April 16, 2020 to March 7, 2024. The fair value of the swap will fluctuate with changes in interest rates.

﻿

11

Also on March 7, 2017, the Company amended the cross currency swap, entered into on January 23, 2015, into a new cross currency swap, to hedge its net investment in Europe, based on the U.S. dollar / Euro exchange spot rate of $1.04795. The Euro notional amount remained the same at €178 million, the interest rate was lowered from 3.40% to 2.85%, and the maturity date was extended from April 16, 2020 to March 7, 2024.

﻿

Both swaps were amended and restated in conjunction with the March 7, 2017 amendment to the Company’s Term Loan Credit Agreement.

﻿

At June 30, 2017 and December 31, 2016, the U.S. dollar / Euro exchange spot rate was $1.1419 and $1.0516, respectively. The following amounts were recorded in the Condensed Consolidated Balance Sheets as being payable to counterparties under FASB ASC No. 815, Derivatives and Hedging (in thousands):

﻿

﻿

﻿

Location

June 30, 2017

December 31, 2016

Cross currency swap

Other non-current liabilities

$

13,804

$

4,993

Interest rate swap

Other non-current liabilities

9,543

2,451

All derivative instruments are recorded at fair value. Effectiveness for net investment and cash flow hedges is initially assessed at the inception of the hedging relationship and on a quarterly basis thereafter. To the extent that derivative instruments are deemed to be effective, changes in the fair value of derivatives are recognized in the Condensed Consolidated Balance Sheets as accumulated other comprehensive income (“AOCI”), and to the extent they are ineffective or were not designated as part of a hedge transaction, they are recorded in the Condensed Consolidated Statements of Operations as interest expense, net. The cross currency swap qualifies as a net investment hedge of the Company’s European subsidiaries. The interest rate swap qualifies as a cash flow hedge of the interest payments related to the Company’s Term Loan. In all previous periods, the Company had not accounted for the interest rate swap as a cash flow hedge, and all changes in fair value were recognized in the Condensed Consolidated Statements of Operations as interest expense, net.

The following table presents the deferred gain / (loss) reported in AOCI at June 30, 2017 and December 31, 2016 (in thousands):

﻿

﻿

﻿

Deferred gain in AOCI

﻿

June 30, 2017

December 31, 2016

Cross currency swap

$

20,324

$

35,699

Interest rate swap

(7,441)

-

Total

$

12,883

$

35,699

﻿

Derivative instruments held during the period resulted in the following (income) / expense recorded in income (in thousands):

﻿

﻿

﻿

(Income) / expense recognized

(Income) / expense recognized

﻿

(ineffective portion)

(ineffective portion)

﻿

Three Months Ended June 30,

Six Months Ended June 30,

﻿

2017

2016

2017

2016

Cross currency swap

$

(2,573)

$

(601)

$

(6,563)

$

(629)

Interest rate swap

(57)

957

(349)

3,411

Total

$

(2,630)

$

356

$

(6,912)

$

2,782

﻿

﻿

﻿

﻿

﻿

Note 10. Income Taxes

During the three months ended June 30, 2017, the Company recorded income tax expense of $7.7 million on $27.4 million of pre-tax profit from continuing operations – for a worldwide effective tax rate of 28.1%. Included in the $7.7 million of worldwide tax expense was $5.6 million of deferred tax expense attributable to U.S. operations.

﻿

During the three months ended June 30, 2016, the Company recorded income tax expense of $6 million on $21.3 million of pre-tax profit from continuing operations – for a worldwide effective tax rate of 28.2%. Included in the $6 million of worldwide tax expense was $5.5 million of deferred tax expense attributable to U.S. operations.

﻿

During the six months ended June 30, 2017, the Company recorded income tax expense of $14.2 million on $50 million of pre-tax profit from continuing operations – for a worldwide effective tax rate of 28.4%. Included in the $14.2 million of worldwide tax expense was $10.8 million of deferred tax expense attributable to U.S. operations.

﻿

During the six months ended June 30, 2016, the Company recorded income tax expense of $9.5 million on $33.5 million of pre-tax profit from continuing operations – for a worldwide effective tax rate of 28.3%. Included in the $9.5 million of worldwide tax expense was $7.8 million of deferred tax expense attributable to U.S. operations.

12

﻿

﻿

﻿

Note 11. Retirement Plans

The Company sponsors a pension and various other postretirement benefit plans for its employees. Each plan serves a defined group of employees and has varying levels of Company contributions. The Company’s contributions to certain plans may be required by the terms of the Company’s collective bargaining agreements.

The following tables provide the components of net periodic pension benefit cost and other post-retirement benefit cost (in thousands):